Vietnam Currency Discussion Board

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Vietnam to Devalue Dong 3.4%


By NGUYEN PHAM MUOI And PATRICK BARTA

HANOI—Vietnam said it will devalue its currency for the second time in less than three months as the Southeast Asian nation continues to struggle with a hangover from economic volatility during the past two years.

An increasingly popular destination for Western capital, Vietnam continued to post strong growth rates even through the dark days of last year's global recession. But economists say the country's strong recent performance–including growth of roughly 5.5% in 2009, according to the World Bank—masks serious underlying problems including a large trade deficit, high inflation and a shortage of U.S. dollars needed to keep the financial sector humming.

All that has put severe pressure on the Vietnamese dong as local residents lose confidence in their currency. By contrast, some other Asian countries have seen their currencies rise recently, as their economies regain their footing after the latest global financial crisis.

The State Bank of Vietnam, the country's central bank, said Wednesday it will devalue the Vietnamese dong by 3.4% effective Thursday. That comes on top of a 5% devaluation in November and two other devaluations since June 2008. Now, one U.S. dollar will buy 18,544 dong, compared to 17,941 dong earlier in the week.

The central bank on Wednesday also imposed a 1% ceiling on interest rates on dollar deposits at banks by "economic institutions," not including credit institutions, to try to flush more greenbacks into the market.

The devaluation will help make Vietnam's key exports, which include shoes, coffee and rice, cheaper than those of many other Asian countries, potentially improving its relative position in global trade. That could increase tensions with some neighbors, especially Thailand, with which it competes heavily in global markets. Thailand has already complained that some currencies in the region, including the Chinese yuan, may be undervalued.

But it's unclear whether the devaluation will be enough to ease the tensions in Vietnam's economy. The problems stem in part from imbalances lingering from Vietnam's years of rapid expansion from 2000 to 2007, when gross domestic product grew an average of 7.5% a year and inflation got out of control, reaching a peak of 28% in August 2008.

Although the global credit crunch helped ease inflation, it dented foreign direct investment in Vietnam and pushed exports into a slump, swelling the country's trade deficit and exposing its over-reliance on overseas markets. Vietnam estimated its trade deficit in January was $1.3 billion, with imports leaping 87% and exports rising 28%.

Inflation, meanwhile, has shown signs of returning: January inflation was 7.62%, exceeding a government target for the whole year of 7%.

Many Vietnamese residents have responded by hoarding dollars out of fear the dong will become even less valuable in the future.

The non-convertible Vietnamese currency is allowed to trade within a band of 3% on either side of the midpoint the central bank sets daily. However, it has been beyond the band's weak end on unofficial markets for more than a year – an indication of residents' lack of confidence in the dong.

On the unofficial market, such as in gold shops that double as foreign-exchange dealers in Vietnam, one dollar was buying 19,180 dong earlier on Wednesday.

The latest devaluation comes just days before the Lunar New Year festival, or Tet, which is Vietnam's biggest holiday, a time when cash is in demand and bank liquidity is under pressure.